Economics Assignment: Digital Currency Development In China & Europe

Question

Task: Main task

Submit a report on economics assignment that addresses the below questions. The report should have a cover, table of contents and the references at the end. Citations along the text that indicate where the information used comes from are necessary.
Part1: Explain the pros and cons for China of developing a digital currency, the digital yuan.
Part 2: Explain the pros and cons for Europe of developing a digital currency, the digital euro.
Part 3: List the main 5 differences for China and Europe of developing a digital currency.

Answer

Executive Summary
Theeconomics assignment report sheds light on the concept of digital currency and the study is conducted considering China and Europe. The digital currency would complement the cash offering and hence provide a major landmark in the retail system of the currency. The digital euro will support the objective of the Eurosystem and providebenefit to the citizens for retail payment. On the other hand, Yuan will provide a strong base to the financial system of the country. The report initiates with the introduction followed by the discussion of Yuan and Euro. The report concludes summing up the fact that digital currencies provides a heap of opportunities however the same is coupled with some drawbacks.

Introduction
Digital currency is the major point of discussion in the present scenario that comprises of the utilization of the electronic devices in the services payment. Every nation around the globe is in the quest to adapt to the virtual currency as the major means of payment. Thereby, virtual or digital currency pertains to the money balance that is recorded on the electronic devices. The transactions happen utilizing the technologies like credit cards, phones and online crypto exchange. The finances can be used for the payment of services or while purchasing goods. But there are limitations in the usage of the currencies such as in gambling or social network. Digital money can further be converted into physical cash via the process of cash withdrawal from the ATM. The usage of the digital currency is laced with different benefits. In short, the presence of digital currencies has ensured payment process manageable, digitalization of the economy, lowering of the transaction cost and creation of trust between the customers (Clark 2018).

1. Development of Digital currency the Yuan
China started working on the digital currency in the year 2014. In 2016, the People Bank of China established the digital yuan prototype. Towards the end of the year 2017, PBoC started the R&D of the digital Yuan that witnessed participation from various big commercial banks, telecommunication player and internet companies. After five years China became the only country to launch a huge pilot for the CBDC in various cities such as Shenzhen, Xiong’an and Chengdu.

The pros and cons of China’s Digital currency
Digital currency comprises of various benefits however at the same time it attracts risks. The following are the pros and cons of the China’s digital currency

Pros
• Easy utilization
Going by the utilization of the early users, the usage of e-CNY is easy and denotes a close resemblance to the digital wallets that are existing such as Alipay and WeChat Pay. The application is user friendly and easy so that switching should not be complex for a layman. When the currency reaches the status of nationwide, people can adapt to it with ease (Wilson & Jones 2021).
• Zero transaction fees
Whenever a user pays through card or any other mode the service provider charges a definite amount for the overall transaction. However, the same does not hold true for the case of payment done via e-CNY because no transaction is levied on the same. When it comes to the traditional mechanism of payment, the service provider charges and hence is unavoidable in nature. Transaction cost in virtual currency is majorly lower. Moreover, this means of payment comprises of no inflation.

• Financial stability
The supply of private credit by the commercial banks enhances the nominal interest rate. It lessens the reserve deposit ratio of the bank and impacts the financial stability in an adverse manner (Wilson & Jones 2021). However, when such banks receive deposits in the CBDC, a surplus amount projects no more holding of reserves. Hence, an increment in the private credit supply lessens the nominal rate of interest thereby giving a major boost to the stability of the financial system. Thereby, it leads to well defined anonymity.
• Countering criminal activities
Drug dealers, as well as extortionists use Bitcoin, Ethereum and Litcoin for their activities. However, the same is impossible with the presence of digital currency because it helps in combating money laundering, terrorism and other criminal activities. Through the usage of the physical assets, the individuals have a risk of getting robbed but in the case of virtual currency till the time the personal data is not lost such incidence cannot happen.
• Efficiency
As the transfer happens through electronic method, the end result happens to be at the earliest in comparison to any other mechanism. Moreover, there are no chances of inaccuracies.

Cons
• Privacy
When it comes to CBDC it is 100% trackable by the Central Bank of China. When someone uses the Central bank it will be easily known who is paying and the amount spent, time of payment, location and the payment pattern (Wilson & Jones 2021). This can be an intrusion to their financial management scheme.
• Forceful imposition
It is well implied that Alipay, as well as WeChat hold data when it comes to transactions and the government can easily track it. No third party is involved because the digital yuan is developed by the central bank. There is an apprehension that Chinese government can force Chinese companies to consider the digital currency. This can enable the foreign companies to foreign counterparts to utilize only CBDC.
• Unable to send money to friends
For the digital currency to be popular and flexible, the user must be able to send money to any desired party. However, when it comes to the trial of CBDC, people felt that the currencies cannot be sent to the friends and families. This is one of the major disappointments in the utilization of the currency (Verhage 2020)

• Foreign Government issues
The data collection fear is a major issue and is a major question whether the foreign government will allow the businesses their citizen to utilize and hold yuan. This is a major consideration and it seems that the countries might not be ready for the transaction in the digital currency of China due to the private issues (Thompson 2020). Moreover, the digital Yuan is in the pilot stage for the domestic utilization. Irrespective of the advantages and disadvantages, it is providing all a major look to the future ahead and will definitely have a first mover advantage.
2. Pros and cons for Europe of developing a digital currency, the digital euro.
The Euro system is beneficial as it provides safe money and reliable way of payment to household, business and the overall financial system in the euro area. Through pursuance of the task of maintenance of monetary and financial stability it provides that money, as well as payment serves the entire European society at large (Koller 2020). The innovation is proceeding at a rapid pace and the citizens have shown strong preference for the digital payment. This is altering the changing scenario and raise various question for the core function. However, the digital currency has its own pros and cons. There are possible advantages and disadvantages of the digital euro and the same will be discussed hereunder.
Pros
The main advantage of the digital euro ensures that there will be a rapid change in the segment of retail payment and this implies Eurosystem will undergo major change. The presence of digital euro will support the objectives of the Eurosystem through providing citizens a process access to safe form of money in the ever-changing digital space (Hurley, Morris &Portelance 2019). The entire world will back up the drive of Europe towards the process of innovation. It will even contribute to the strategic autonomy through providing an alternate to the foreign payment providers for effective and efficient payment in Europe and above. Furthermore, a digital euro will provide various benefits in various scenarios. For instance, the usage of cash will go down to a major extent and other electronic means will reduce significantly and will replace the existing mode of payment.
Euro Gains
The presence of Euro will play a major role when it comes to the reinforcement of the economic autonomy. The issuance of CBDCs by the major central banks can increase the status of the international currencies at the euro expense. In such a scenario, the Eurosystem might consider issuance of a digital euro in parts to back up the international euro role, stimulation of the demand for the euro among the foreign investors (Hurley, Morris &Portelance 2019). A cooperative approach to the interoperable design can further contribute to the strengthening of the euro international role and enhancing the cross currency payment without granting non-euro area dwellers the access to the digital euro. Furthermore, the digital euro can fill the gap and correct the deficit in the prevailing cross currency payment infrastructure probably for remittance transfer.

Promoting competition and providing new trends
The emergence and supply of new private digital currencies will favor the concept of decentralization of the orthodox traditional value chain and hence can promote the money creation and credit flow to the economy. Additionally, this can back up situations such as dominance or higher fragmentation that can damage the financial stability. Considering the digitization path, the Digital euro issuance can lead to the preservation of the interest of the consumer; safeguard the privacy and the prevention of money laundering. The emergence will be a boon considering the payment circuit and the development of technology like the electronic identity (Fatas& Di Mauro 2019). Thereby, this would be a dynamic factor for the digitization process hence enabling the possibilities of the business.

Cons
• Decline in the cash usage
There would be an acute shortage in the economy cash position and would denote the increasing dependence on the private money form and other private solution in the euro segment. After a certain time span, such a trend can lead to endangerment of the infrastructure of cash and hamper the instance of adequate cash service. Thereby, European citizens will face an uphill task in accessing the means of payment that is provided by the public sector and hence considers the needs irrespective of any situation (Fatas& Di Mauro 2019). The decline in the cash usage, the Eurosystem will bring a digital euro as a new form of public money and payment method. To satisfy the users need, the digital euro will be cheap in terms of usage, providing better level of fraud prevention and leading to faster payments.

The introduction of the digital euro might even impact the financial intermediation that is replacing the payment means that the financial sector provides or the banks that safeguard in times of crisis. Considering the scenario where the Digital Euro was accessible to the non-residents and incompatible with the system of payment of other currencies, the negative impact of financial stability can spread and change the role of other currencies.
• Impact on the financial stability
The emergence of the digital euro can impact the monetary policy transmission and have a negative influence on the financial stability for instance by challenging banks intermediation capacity and impacting the risk free interest rate. Resting on the features as an investment form, it might induce the depositors to transform the deposits of commercial banks into the liabilities of the central bank. this might lead to an increment in the bank’s funding cost and hence this will lad to the reduction of the volume of the bank credit to the economy. Bank can react to such a trend in many ways. One solution is to stabilize the deposits by enhancing the remuneration or bundling them with different services.

• Profitability and risk taking of the central bank
The issuance of the digital euro will change the entire structure of the balance sheet of the Eurosystem and hence will have a major influence on the profitability and the risk exposure. Issuance of money is profitable and lead to generation of income because of the difference between the central bank assets remuneration and the interest rate that is applied to the liabilities of the central bank (Fatas& Di Mauro 2019). Furthermore, a digital asset will substitute the banknotes and at the same time considerable increment can happen if the non-euro area residents shift their non-negligible part to the portfolio in the digital euro. Moreover, in addition to the risks linked to the composition of the balance sheet and composition, the Euro system might be exposed to the financial liabilities as an operator of the payment system (Fantesini 2021). For instance, there might be a malfunction of the IT infrastructure that underlies the digital euro causing damage to the individual users and raising comment on the central bank responsibility.

3. 5 Difference of developing a digital currency
The main motive of China to develop a digital currency is to protect the currency sovereignty. On the other hand, Europe wants to develop digital currency is to provide access to the public to digital money and cash to the people Secondly, the development of CBDC is to enhance the efficiency of the financial transactions between the trading nations that does not bring the US. On the contrary, the presence of digital euro will combine the digital payment efficiency together with the central bank money safety (Clark 2018).
Thirdly, the digital currency might lead to various possibilities and opportunities for strong control of the financial transactions. Digital money can be created, as well as removed as it does not require to be printed and does not exist in the physical mode. Alternatively, the presence of Euro would help the situation where people will no longer need cash and would avoid the dependence on digital payment (Fantesini 2021).
Fourthly, the digital currency will lead to various possibilities for the monetary policy for China. On the other hand, the development of Euro will provide safeguard to the finance part of the people. Lastly, development of the digital currency will lead to stability in the economy of China while European digital currency will lead to lower cost and lower trading risk.

Conclusion
Consumers always prefer secure means of doing business across the world. For conducting such a business there are various transactions that are needed to be done. The transactions require to be secure followed by the concept of efficiency. Hence, digital currency is always preferable s it is faster, efficient and accurate in nature. Hence, this has influenced various organizations and countries to implement this concept. In totality it can be commented that the digital currency is of utmost importance and can be easily done with the help of various tools. The usage of digital currency provides ample benefits such as lower cost of transaction, no inflation, and enhanced trust with customers, and transparency in transaction. As discussed in the above report, both Europe and China will benefit from the development of the digital currency. However, there are some drawbacks associated with it that needs to be taken into consideration.

References
Clark, T 2018, Top Advantages Of using Digital Currencies, viewed 15 March 2021, http://www.sayrechamber.com/top-advantages-of-using-digital-currencies/
Fantesini, A 2021, Digital Euro, advantages and risks of the ECB's new virtual currency,viewed 15 March 2021, https://www.i-com.it/en/2020/10/16/euro-digitale-bce/
Fatas, A & Di Mauro, B. W 2019, The benefits of a global digital currency, viewed 15 March 2021, https://voxeu.org/article/benefits-global-digital-currency
Hurley, J, Morris, S &Portelance, G 2019, Examining the Debt Implications of the Belt and Road Initiative From a Policy Perspective, Economics assignmentJournal of Infrastructure, Policy and Development 3(1), 139–75
Koller, D 2020, Advantages and Disadvantages of Digital Money for Business, viewed 15 March 2021, https://www.exprance.com/advantages-disadvantages-digital-moneybusiness Thompson, P 2020, Central bank digital currencies: What are the benefits of digital money viewed 15 March 2021, https://coingeek.com/central-bank-digitalcurrencies-what-are-the-benefits-of-digital-money
Verhage, J 2020, PayPal Moves Further Into China With UnionPay Partnership, viewed 15 March 2021, https://www.bloomberg.com/news/articles/2020-01-22/paypal-moves-further-into-china-with-unionpay-partnership. Wilson, T & Jones, M 2021, China Proposes Global Rules for Central Bank Digital Currencies, viewed 15 March 2021, https://www.reuters.com/article/us-cenbanks-digital-china-rules-idUSKBN2BH1TA